Thursday, March 7, 2013

My Prediction on the Price of Gold

I made the following prediction about the price of gold to the German financial website Focus-Money:

The US monetary base has more than tripled in the past six
years;* the large commercial banks can multiply each dollar that the
Federal Reserve Bank creates up to tenfold. The banks’ lending often has
been ill advised. The collapse of Lehman Brothers** and the survival of
other large Wall Street firms through public subsidization evidence
misallocation of wealth, which has caused income inequality and slowed the free
market system’s creative processes. The resultant income inequality and growth
reduction have increased demand for welfare entitlements. Whether,
in the short run, there is deflation due to loan defaults or inflation due to
monetary expansion, there will be dollar instability. Recently, the
dollar’s reserve currency status and China’s trade policies have mitigated
inflation, but this lucky (for the U.S.) arrangement can change
overnight. Because of public demand for entitlements--caused by
injudicious, state-guided economic policies--the US government, like several
European governments, is borrowing at an unsustainable rate and lacks the
political will to contract its borrowing. Economic and dollar instability
coupled with government’s unquenchable thirst for debt to subsidize
entitlements will lead to expansion of the recently created bank reserves to
monetize government’s debt. The result will be depreciation of the dollar
and an end to the dollar’s reserve currency status, much like the end to the
pound’s role in the early twentieth century. The ultimate price of gold
is unpredictable in dollar terms, and it may go to infinity. As with many
economic phenomena, the difficult question is when my predictions will unfold.

I don't recall making a prediction about inflation. Can you point to where I did?

I've looked through my blog and can't find any predictions about inflaton.

Inflation has been over 4% since 1970, a rate that was considered astronomical in 1970, when I was a teenager, but is for some reason claimed to be low today.

Moreover, and worse for the future, the Chinese have absorbed much of the inflation by purchasing dollars to buy treasury bonds. That can continue for years; so the modestly high inflation rate of the past 40 years can continue, say, for another 10 or 20 years--or not.

My point is that it is an unstable system, and it will collapse. When it does, and you're an 85-year-old, you will be sucking your thumb while driving to work.

Please do show me where I predicted the inflation rate. I chiefly made the gold prediction because the reporter asked for it.

The recent increase in commodity prices is not especially long in the tooth. We could see much greater inflation in the coming years if global dollar holders decide to sell.

Third, Howard S. Katz has argued, convincingly, that the low commodity prices of the 1990s were attributable to the Greenspan Fed's high rate of monetary inflation. The initial effect of the Greenspan Fed's monetary expansion since the Reagan era was to reduce interest rates. The low interest rates led to an expansion of commodity production because miners and other commodity producers could borrow and so expand their production. The expanded production led to price competition in the 1990s, which in turn led to low commodity prices and low inflation. However, the producers closed their doors because of the lower prices. Mines and farms became less profitable. However, the monetary expansion has led to continued increased demand. It will take time before the mines can reopen, and therefore commodity price inflation will continue for several years.

Katz's argument is applicable to the new stock market increase due to massive expansion of the monetary base. Relaxation of credit has stimulated mining production along with stock market increases, except now interest rates are near zero and the stock market won't experience as long a bubble as it did from 1981 to 2000. More likely the current bubble will last a few years. There could be apparent deflation in this period. Within a few years you will see another market crash and rising commodity prices. At that point, the Fed won't be able to reduce rates further. The American economy is garbage, and the Baby Boomers will be going through garbage cans during their retirement years.

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Mitchell Langbert

About Me

I have researched and written about employee benefit issues and in my previous life was a corporate benefits administrator. I am currently associate professor of business at Brooklyn College. I hold a Ph.D. from the Columbia University Graduate School of Business, an MBA from UCLA and an AB from Sarah Lawrence College. I am working on a project involving public policy. I blog on academic and political topics.